The role of forage in profit

Published 10 July 15

When assessing any element of your business it is important to know what the key drivers for profitability are. Last month saw the publication of the AHDB Dairy Evidence Report – GB Dairy Herd Performance 2013 -14 analysed a stratified sample of 340 dairy businesses. The AHDB Dairy report aims to look at those key drivers, one of which is feed and forage.

The following article from P&L Agri-Consulting sets out where they have completed analysis of their clients’ data to assess where they can best drive their businesses forward.

At the BGS/AHDB Dairy/RABDF Forage Field event this spring in Mold, Flintshire, Philip Clarke, from P&L Agri-Consulting, spoke about the role of forage in profit for dairy systems, for his client base.

Philip Clarke advises Ed Morgan, the host for the Forage Field Event, who has made the transition from all-year-round calving to an autumn block calving herd in an attempt to maximise the use of grazed grass.

With recent turbulence and volatility in the milk market, it is more vital than ever that cost of production on farm is looked at and assessed individually, using benchmarking techniques.

P&L Agri-Consulting has just finished analysing the data from across its client database, focusing on cost of production mainly through Cheshire, Shropshire, Staffordshire and North Wales. The figures collected include variable costs, overhead costs, rent and finance, depreciation and the cost of family labour.

The main aim of the data collection was to try to determine which system (from within the P&L Agri-Consulting client base) was best suited to cope, under UK climatic conditions, with an ever-increasing fluctuation in milk price. By doing this, it will become much clearer which are the most important factors affecting costs of production and, therefore, provide us with the key benchmarks for our clients as to how to improve their farms’ profitability.

Initial Results

Comparison of the results

It is always important when analysing data, that the data you are using gives as true and correct reflection as possible. Therefore, to compare this data, P&L Agri-Consulting has compared some key descriptors against the most recent, largest UK data set which were those produced by AHDB Dairy.

Cost of production

 

AHDB Dairy Evidence Report

The recently published AHDB Dairy Evidence Report – GB Dairy Herd Performance 2013 -14 aims to address four areas of interest in the dairy sector including point three, below:

  1. Provide physical and financial performance data to support strategic investment decisions in England, Scotland and Wales
  2. Provide the financial evidence to support farmers wishing to review their production
  3. Highlight to farmers with unprofitable operations, specific production cost areas they might address to improve their efficiency and business resilience
  4. Provide an insight into the economic competitiveness of UK dairy farming as a whole, based on the results from the International Farm Comparison Network (IFCN)

The AHDB Dairy evidence report does not attempt to address questions relating to different types of farming systems or to champion or compare any aspect of technical excellence. The data is focused on providing a foundation level of industry costs and margin potential to guide or support business decisions for farmers from all dairy farming systems, as they look for a way to maximise profit during price volatility.  

 

The cost of production for the P&L data set analysed is shown in the table below.

Cost of production 2

The range in cost of production (CoP) over the P&L Agri-Consulting data set was 14.8 p/litre, with a range in milk price being only 4.74p/litre. With the AHDB Dairy data set, these same ranges were 10.1p/ litre CoP range and 1.2p/litre milk price range, respectively, between the top and bottom quartile based on net margin, or 37.5p/litre and 13p/litre milk price range based on minimum and maximum of the data. This shows that there is much to be gained from time spent analysing your own business and benchmarking against the most efficient, in order to highlight the areas where improvements can be addressed.

Yield Vs cost of production

Contrary to a popular belief held by some, increasing yield per cow reduces cost of production by diluting fixed costs, the P&L Agri-Consulting data shows this is not the case. There is little/no correlation found between yield and cost of production. In fact, there was a slight increase in the cost of production on pence per litre basis as yields rose in the P&L data.

The yield was calculated from total litres sold off the farm, divided between the average herd sizes. No account was taken for waste milk or milk used on farm.

Yield/cow vs total cost of production

 


The yield range within the herds analysed was from 4,750 litres up to 10,104 litres and the data shown on the graph above shows the spread in cost of production. The data shows that, irrespective of yield, a lower cost of production can most likely be achieved. There are herds on the graph with yields over 8,500 litres/cow with CoP within the top 25% of producers. There are also herds under 5,500 litres/cow in the bottom 10% ranked on CoP.

cost of milk production v yield

 

Yield from forage per ha vs cost of production

There was a strong correlation between milk yield per forage hectare and cost of production. The best herds were managing to utilise over 7,000 litres from forage/ha, with the worst performing herds only managing to utilise 1,000 litres or less.

Total cost of production v yield from forage

The data showed that, for every additional 1,400 litres utilised from forage hectare, the average farm saw a decrease in cost of production by 1p/litre. This highlights the very high importance of utilising forage in any system. It can be seen in the graph below that high yields from forage per ha can be achieved at whatever yield per cow.

Yield/cow vs yield/forage ha

This graph shows that there are quite a few herds producing over 8,500 litres per cow and still achieving over 6,000 litres utilised per forage ha. This confirms that high utilisation of forage can be achieved even at high yields.

Systems analysis

P&L has categorised its farms into the following systems:

  • Spring block calving
  • Autumn block calving
  • All-year-round (AYR) calving – all cows grazed in the summer (highs buffered if required)
  • All-year-round calving – only lows grazed (highs housed all year round)
  • All-year-round calving – housed all year round

This has been done to determine any trends that may be present between systems. From this, the average cost of production by system type has been calculated, see graph below.

Total cost of production by system

 

The data shows a difference in cost of production (CoP) of 5.21p/litre between the lowest and the highest cost systems for this data set, with the average cost of production on systems based around grazing generating a 4.57p/litre lower CoP than their predominantly housed contemporaries, within this sample size. Contrary to strong belief, there were little differences in cost of production between spring block and autumn block calving systems shown here.

 

Variable costs

 

The graph below illustrates P&L client differences in variable costs dependent on system: 

Total variable costs by system

As expected, spring block calving systems do show the lowest variable costs per litre, with all-year-round calving fully housed systems having the highest variable costs, with a difference of 3.22ppl between them and the predominantly grazed herds. The top 25% of our farmers all put a value on grazing grass, irrespective of yield per cow, these ranged from 4,700 to 9,700 litres per cow. The majority of these producers measured their grass regularly and, using this data, were more likely to improve utilisation of grazed grass.

Overhead costs

The graph here illustrates the differences in overhead costs, dependent on system:

Total overhead costs by system

 The lowest overhead costs on a per litre basis were seen on AYR calving systems, which grazed all cows during the spring and summer months. These herds maintain higher yields (in excess of 8,000 litres) without housing all year round. This enabled these producers to dilute their cost of production without adding system cost involved in housing cows during the summer months.

Added overhead costs were more likely seen in systems in which cows were housed all year round, or a large percentage housed all year round. A dilution in overhead costs in continually housed systems is not seen in this data set until herd size exceeds 400 cows at yields over 10,500 litres/cow; it is only at this point that benefits can be seen in spreading labour, power and machinery costs.

Range in cost of production by housing period

Conclusion

The data collected over P&L Agri-Consulting farms should be representative when comparing other UK farms. With this sample illustrating an average herd size of 264 cows at a yield of 7,842 litres per cow with an average cost of production at 30.15ppl.

Key findings

  • Largest difference in CoP between herds was the operating cost of the system rather than  any direct input cost
  • The lowest CoP systems were based around grass utilisation irrespective of yield per cow. For P&L clients this system, ultimately, leads to a focus on cost control rather than following a highly mechanised and higher cost system chasing yields. A grass-based system does not mean low yielding and these figures confirm this
  • Good fertility and maximising stocking rate was a key driver to achieving high forage efficiency and achieving a low cost of production
  • The predominantly housed systems from our sample were not large enough, and too low yielding, to achieve a dilution of costs to be economically competitive
  • All of the producers in the top 25%, based on cost of production, put a high reliance on grazed grass and measured it regularly.

P&L Agri-Consulting is aware that every farm is different and that different farms lend themselves better to certain systems, however, we would strongly advise that to maximise profitability during times of volatility, a system base around maximising forage utilisation, predominantly from a grazed grass basis is followed. This data has proved that high levels of pasture utilisation can still be achieved with yields in excess of 9,000 litres per cow.

We would therefore suggest, depending upon the farm layout, that producers with a herd size below 400 cows and yields under 10,000 litres per cow do not house their cows 365 days of the year.

The key message in these times of milk price volatility and uncertainty would be to seek trusted professional advice, and use these people to look through your accounts in detail and formalise a profit production strategy to enable your business to trade at a profit at these low prices, not just when the price rises again. This will enable your business to be in a position to take advantage of opportunities that arise during these turbulent times.

Do not be persuaded, by people who have not seen and do not understand your accounts, to follow a system based around their own personal gain, by selling you a product which may not increase your overall cash profitability. This is a time of austerity for all dairy farmers and every penny you spend needs to be evaluated. Take a look at all the things you buy and ask yourself, do you really need them? Many of these things may have been purchased to increase production, or insure against the ‘what if?’ scenario. During these difficult economic times you can’t afford these items. This is the time where you need to put faith in your own farming ability and cut out all the production add-on’s in your system, which you acquired when you were receiving a much higher milk price.